Despite high prices, consumption of gasoline is rising in the United States

WASHINGTON—Gasoline prices have reached $3 a gallon in some parts of the nation, and crude oil is hovering close to last summer's record high. With peak summer-driving season and hurricane season approaching, experts fear that today's high prices might look like a bargain later this year.

The culprits are geopolitics, changes in the way refineries produce gasoline, lagging oil production in the Gulf of Mexico and—most of all—us, American consumers.

Despite higher prices for crude oil and gasoline, U.S. demand for fuel continues to grow. It was up by more than a full percentage point in March and is expected to climb still more when the peak-driving season begins in May.

That will keep gas prices between $2.50 and $3 a gallon—if there are no major disruptions in supply, experts said.

If anything goes wrong with the weather or geopolitics, watch out. "We may look back at the day fondly when we paid $3 a gallon," said Phil Flynn, a vice president and energy expert at Alaron Trading Corp. in Chicago.

Gasoline prices have been rising again after dropping from last summer's record of $3.05 on average for a gallon of regular unleaded. The American Automobile Association said Friday that that price now stood at $2.60, 27 cents higher than a month ago and 35 cents higher than April 2005.

Crude oil prices flirted with $69 a barrel this week on the New York Mercantile Exchange, approaching the all-time high of $70.85 last Aug. 30 immediately after Hurricane Katrina.

What moved prices this week was a report by the Energy Information Administration, the statistical arm of the Energy Department, that showed a larger-than-expected draw-down of U.S. gasoline stocks. That spooked energy traders because it suggested either that refiners can't keep pace with the demand for gas or companies that fear shortages are hoarding.

Some price increase this time of year is expected as refiners partially shut down and retool to switch from winter formulas for gasoline to summer formulas to meet evaporation standards.

But an unusual confluence of events is driving the large difference between last year's price and this year's.

Chief among them is new environmental concern over a common additive known as methyl tertiary butyl ether. MTBE helps refiners comply with Clean Air Act requirements by making gasoline burn more cleanly and emit fewer toxic byproducts.

Some states—most notably California, New York and Connecticut—have banned MTBE, however, because it contaminates groundwater, and on May 5 the federal government no longer will require refined gasoline to contain at least 2 percent by weight of additives such as MTBE.

Many refiners, unable to sell in some states and fearing future environmental claims in others, are no longer putting MTBE in their gasoline, which could reduce the volume of the nation's fuel supply by about 1.6 percent, a large amount in a tight market.

"We've been warning about this for years. It's really a very unfortunate situation we're into here," said Robert Slaughter, the president of the National Petrochemical & Refiners Association in the nation's capital.

The refiners group couldn't say how much its members already have cut back on MTBE use or how many will stop using it after May 5.

The American Automobile Association, however, thinks the MTBE issue is already driving up gas prices.

"We're looking for some quantifiable data on that, but it does appear that it is having an effect," said Montill Williams, a national spokesman for AAA in Washington. "We are concerned that the conversion may be somewhat more difficult than anticipated and we do think it's contributing to higher gas prices."

Last summer's hurricanes remain a problem. Refineries operated by Murphy Oil and ConocoPhillips in Louisiana and British Petroleum's refinery at Texas City, Texas, are still inoperable or only partly running. Together the three refineries accounted for almost 4.5 percent of the nation's refining capacity, Slaughter said.

Crude oil production also still lags in the Gulf of Mexico; 87 platforms that previously produced 340,000 barrels a day still aren't operating, the Interior Department reported this week.

Fear is pushing up prices, too.

The new storm season begins June 1. With researchers at Colorado State University this month forecasting nine hurricanes for 2006, at least five of them intense, oil traders are stockpiling for the worst.

They also are bidding up prices on worries of political turmoil in several oil-producing countries.

In Nigeria, rebels this week threatened to attack oil installations that supply the light, sweet crude oil that many U.S. refiners favor.

Iran's standoff with Western powers over its nuclear program puts a cloud over Middle East oil supplies.

Closer to home, Venezuelan President Hugo Chavez seized operations from France's Total and Italy's spA this week under a government plan to renationalize oil concessions. ExxonMobil and Norway's Statoil have sold stakes in projects and are exiting Venezuela, a primary supplier to the U.S. market.

It all adds up to a volatile market.

"It wouldn't take much" to raise prices, AAA spokesman Williams said. "The environment we're in now doesn't look too promising for being able to hold off these prices."